Interest rates held at 0.5% again, spelling more misery for savers

Interest rates could rise as soon as next month, dealing a shock to
Britain’s 10million homeowners with a mortgage, experts said yesterday.

Their warning comes after the Bank of England kept the base rate at
0.5 per cent yesterday for the 25th month in a row – the lowest level
since the Bank was founded in 1694.

But a poll of 66 economists, by the financial newswire Reuters, found 25 expect it will be hiked next month.

Business lobby group, the Confederation of British Industry predicts
rates will soon be increased rapidly, up to 1.25 per cent by December
this year and 2.75 per cent by December 2012.

However experts said savers, whose accounts outnumber borrowers by
seven to one, are being ‘bled dry’ by the continued low base rate.

Meanwhile the European Central Bank yesterday decided to increase
rates for the first time since July 2008 from 1 to 1.25 per cent.

The no-change decision, which means the Bank's base rate has been at 0.5 per cent for 25 months, comes amid further signs that the UK's economic recovery is still not strong enough to withstand the shock of higher borrowing costs.

A string of gloomy updates from the retail sector continued today with profit warnings from Carpetright and Halfords, as consumers tighten their belts in the face of economic uncertainty and higher prices, particularly for fuel.

But with inflation running at 4.4 per cent, the Bank of England risks damaging its credibility by failing to take action over price pressures.

Three members of the nine-strong monetary policy committee voted to
increase rates last month but the majority of policymakers expect
inflation to peak at 5 per cent before heading back to its two per cent
target next year.

Analysts think there is a much greater chance that interest rates will rise next month as members will have access to the Bank's latest economic forecasts.

Interest rates have been held at 0.5 per cent despite rising inflation

Policymakers have been reluctant to move on rates after a 0.5 per cent decline in output in the final quarter of last year.

The OECD downgraded the UK's growth prospects in the second quarter to an annualised rate of 1 per cent last week amid the impact of Government's austerity measures and as the crisis in Libya boosts the price of oil.

FOOD PRICES FALL... BUT IT WON'T LAST

Food prices saw their biggest monthly fall in almost two years last month but shops warn the drop will be short-lived.

Prices dipped 0.5 per cent between February and March in the largest fall since August 2009 thanks to shops putting an unprecedented 40 per cent of items on special offer.

Overall prices were down 0.3 per cent, with non-food items down 0.2 per cent month-on-month. It is the first overall drop since June 2010.

Retailers put on discounts despite the rising cost of oil and other commodities but the British Retail Consortium has warned this will not last.

Soaring oil prices will push up inflation and crop costs could also rise in coming months as supplies fall to critically low levels.

Stephen Robertson, director general of the BRC, said: 'Global commodities are still exerting considerable upward pressure on retailers' costs, but a greater intensity of promotions has led to a fall in year-on-year food inflation, which will come as a great relief to hard-pressed families.'

Ian McCafferty, CBI chief economic adviser, said the Bank of England was in an 'unenviable position'.

He
said: 'Not surprisingly, they've elected to wait until things become a
little clearer before setting their course towards any rises.

'There
are conflicting messages about the low level of consumer confidence
versus brighter prospects for certain sectors, which continue to cloud
the issue. No doubt the MPC is waiting for further signs that the
recovery is back on track before changing its stance.'

The decision to keep rates on hold was welcomed by industry leaders, particularly as UK households have just seen their first drop in disposable income in 30 years after wages failed to keep pace with prices.

Jeegar Kakkad, senior economist at EEF, the manufacturers' organisation, said: 'The current combination of unrest, upheaval and uncertainty we are seeing around the world poses significant risks to growth, whilst, at home, the full effects of fiscal tightening and the squeeze on consumers is still to be felt.

'Maintaining a wait-and-see approach is right until there are clear signs that a period of sustained economic growth is under way.'

Home-owners with tracker mortgages will continue to benefit from record low rates but savers and pensioners will see their cash pile eroded by inflation.

The Bank also kept its package of quantitative easing, designed to stimulate the economy, on hold at £200billion.

Philip Shaw, chief economist at Investec, said: 'It's not surprising that the MPC has kept rates on hold, given the background of economic uncertainty and disappointing news from the high street.

'Our view is that the committee will not put rates up until August but it's possible that signs of even higher inflation or a pick-up in the economy could result in a tightening as soon as the spring.'